Cyprus crisis solution inspires little confidence

Account holders, experts see plan as a Band-Aid

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A woman sold flags in Nicosia on Monday before the Greek Independence Day parade.

By Liz Alderman and Landon Thomas Jr.
New York Times
March 26, 2013

NICOSIA, Cyprus — With her wedding three months away, Despina Charalambous is desperate to have access to her savings, frozen at the Bank of Cyprus for more than a week. She plans to take out all her money once the banks reopen, even though the new bailout plan for her country supposedly guarantees the safety of her deposits.

“I have lost my trust in Bank of Cyprus and banks in general,’’ Charalambous, 33, a biologist, said, still bitter that just last week the president was ready to skim money from small savers like her to help secure a $12.9 billion lifeline to the nation’s banking industry.

Multiply her concerns by tens of thousands of account holders and it is apparent why average people, business customers, and many experts have a suspicion: that European leaders, by scrambling to cobble together a solution to the Cyprus crisis, have come up with little more than a Band-Aid for a growing wound.

Based on the reaction of the markets, analysts, and economists, there is little widespread confidence the measures hammered out Sunday night in Brussels will go nearly far enough to right all that is wrong with Cyrpus’s banks. Stocks were down broadly in Europe, and the borrowing costs of Spain and Italy spiked upward as the markets digested the news — and implications for the euro currency union.

While depositors with less than 100,000 euros in their accounts will be untouched, people with more money will take losses, in a first for eurozone bailouts. So will senior bondholders in some of the banks, who have hitherto been untouchable in such bailouts. And now a eurozone country is taking steps to prevent people from taking their money out of financial institutions.

The measures, known as capital controls, have typically been used only in emerging countries like Argentina. Now Cyprus, a longtime money haven, is struggling to figure out how to prevent it from fleeing.

“This is just the beginning,’’ said Nicolas Veron, a visiting fellow at the Peterson Institute for International Economics in Washington. “For the first time, we have capital controls in the eurozone. We’ve just spent the last three years saying we can’t have that,’’ he said.

‘‘The next time there is a crisis somewhere else in the world, people will think of what happened in Cyprus and will try to get their money out much faster. These are the new rules of the game.’’

The government late Monday ordered Bank of Cyprus and Laiki Bank — the nation’s largest financial institutions, with most of the accounts on the island — to stay shut through at least Thursday. And their automated cash withdrawals will be limited to 100 euros a day.

Under the bailout, Laiki will be restructured, with its guaranteed deposits transferred to Bank of Cyprus.

Bankers and lawyers still working on the bailout deal Monday said that a decision had not yet been reached as to whether Cypriots with deposits under 100,000 euros will be able to walk into their local branches and transfer their deposits to another, safer bank.

“They definitely will not be able send their money overseas,’’ said a person involved in the discussions who was not authorized to speak publicly.

To a large degree, Europe is betting that people like Charalambous will give policy makers a second chance by not heading for the exits when banks reopen.

But experts say that trust, once lost, is not easily regained. In the case of Cyprus, the deep desire by Germany and the International Monetary Fund to make the private sector pay its share of Europe’s latest bailout may have long-term consequences.

“Burden sharing is fine,’’ said Adrian Blundell-Wignall, a member of the influential shop of central bankers called the Financial­ Stability Board. ‘‘But if you make people nervous about their deposits, you are playing with fire.’’

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